Fraudulent Transfer, What is it?
A fraudulent transfer, or fraudulent conveyance, is a type of transaction where funds or assets are taken away from a person or entity with the intent to defraud, usually to avoid paying a debt or liability. The transferred assets are typically either taken out of the reach of creditors or used to enrich someone else with the intent to hinder, delay, or defraud any creditor.
Under what circumstances can a fraudulent transfer occur?
Fraudulent transfers can occur in many circumstances, including when a company is trying to hide assets to avoid paying a debt or when an individual is trying to defraud creditors. Fraudulent transfers may also occur when a debtor attempts to transfer assets to a friend, family member, or business partner with the intent to avoid a debt or liability. In some cases, fraudulent transfers can occur when a debtor attempts to move assets out of the country to avoid creditors.
We often see this when some folks form a limited liability company (or LLC) or Anonymous LLC with us — they will form a new company, and then move cash or other assets into the new company, hoping to save those assets from a creditor or personal bankruptcy.
We also see this when some folks dissolve a LLC or dissolve a corporation, thinking that when they close the LLC or Corporation, they are closing all the liabilities or debts that go with the business — and in fact by closing or dissolving such an entity, they are simply removing the liability protection they enjoyed and can now be personally liability for the closed company’s debts and obligations.
How to avoid a fraudulent transfers?
One of ways to prove a fraudulent transfer has occurred, is to look at the value of the transfer: was is below fair-market value? If not, then it’s pretty hard to prove fraudulent transfer. This means, of course, that assets moved, conveyed or otherwise transferred to another should always be for fair-market value.
The best way to avoid a fraudulent transfer is to be aware of the value of your company’s assets and liabilities, keep a good record of all transactions, and make sure when you transfer any assets, do them for the fair-market value. It is important to keep accurate records of all transfers and to be aware of any possible problems that may arise with these transfers. Additionally, it is important to be aware of any potential red flags that may indicate a fraudulent transfer, such as a transfer to a family member or business partner that may not be in the best interests of the company — in such instances, you should really take care.
Finally, it is important to work closely with a qualified lawyer or financial professional in order to ensure that all transfers are legitimate and to avoid any fraudulent activity. Different states have different rules on this, and the circumstances will matter a lot. For example, if you’re planning to file a bankruptcy or divorce, can have a big impact on how you do things.
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Author: Larry Donahue
Larry Donahue is an attorney and founder of Law 4 Small Business, P.C. He is licensed to practice law in Illinois, New Mexico and the US Patent and Trademark Office.
